All posts tagged Krone

So far at least, 2012 has been the year of the Norwegian krone. The currency stands out as the strongest performer in northern-hemisphere markets, and is only pipped on the world stage by the New Zealand dollar.

There are plenty of reasons for this outperformance, most notably the steady rise in global oil prices with which the krone naturally has a strong correlation.

Oil’s not the whole story though. Norway also scores as a healthy, triple-A rated noncore Europe economy and, admittedly thanks to that oil link, it is far more immune to the euro zone’s long debt agony than its cousin, the Swedish krona.

It’s also notable that, while natural gas is catching up with crude’s share of Norway’s energy exports–it’s around 37% now from 25% in 2009–its price still has comparatively little effect on the currency.

However, given the krone’s stellar year, analysts at Nomura think it will be a big ask for it to appreciate further.

The Norwegian krone has staged an impressive rally in the last month against both its Swedish cousin and the euro.

The krone’s outperformance can be quite easily explained by the resilience of Norway’s domestic economy, surging oil prices and, at least until recently, robust market appetite for such “growth assets.” It hardly hurt that Norway’s central bank didn’t seem terribly concerned about its currency’s rise either.

This plethora of support stands in contrast with the situations in both Sweden and the euro zone. The Riksbank cut interest rates in February, citing its fears for Sweden’s economy as the euro zone languished, and said rates were likely to remain low into 2013. The European Central Bank unleashed another torrent of cheap money for its own commercial lenders just last week.

The Norwegian krone may look like the perfect hiding place but it is just too small.

Also, given the recent deterioration in the global economy, it may not look so perfect after all.

Norway has found itself under increased scrutiny over the last few days as the Swiss National Bank tried to knock its franc from the top of the international safe-haven list by pledging to cap the currency against the euro to prevent it from damaging Swiss exports.

This has left many international investors in a quandary, especially if like some real money funds they are committed to keeping a minimum share of their exposure to Europe. The euro is hardly seen as a good alternative and the pound is also quickly losing its luster as the U.K. recovery falters.

For the last month or so, investors have started to turn to Scandinavia, and Norway in particular, given the relative strength of their economies, their strong fiscal positions and interest rates that look positively attractive compared with the minimal levels available elsewhere.

By the time the SNB had finished surprising the world with its cap on the franc, the Norwegian currency had been pushed up to a new eight-year high against the euro in the international rush for a new place to hide.

However, there are two key reasons why flows in the krone are likely to prove limited…

The dangers of countries mucking up their public finances are all too clear.

Just look at the mess that Greek and Irish finances have flung on the global markets of late. But it’s not just small euro-zone states that are at risk of a rumble in 2011, according to Citigroup’s Greg Anderson, who lines up an impressive roll-call of potential prey that could be targeted in the coming year.

Out of the major economies, Anderson says, the four that are in the biggest need of a fiscal boot camp are the U.S., the U.K., Japan, and of course the euro zone. The fact that these economies are linked to the world’s biggest reserve currencies and that sovereign credit issues have been one of the biggest drivers of currency markets in 2010, means that fiscal fitness suddenly looks terribly important for 2011.

Based on fiscal balances and debt levels, the outlook for these big four currencies looks grim, compared to Norway, Canada and Switzerland, to mention only a few, Anderson says.

The U.K.’s net debt-to-output ratio might double from 2004 levels to hit a scary 65% of gross domestic product next year. Standard & Poor’s flagged this when it gave the country’s AAA rating a negative outlook.